South Carolina Department of Revenue Announces Reduction in Sales Tax Rate for Durable Medical Equipment

The South Carolina Department of Revenue issued a notice, effective July 1, 2011, that the rate for sales of certain durable medical equipment and related supplies will be reduced from 5.5% to 3.5%. This rate reduction is pursuant to a new law adopted by the South Carolina General Assembly.

South Carolina imposes both a sales and use tax on the retail sale and purchase of tangible personal property and certain services. The rate is currently 6 percent statewide, but counties have the option of adding an additional one percent to the overall rate as a “local option” tax. The rate in most counties is thus 7 percent.

While the sales and use taxes are imposed on the retail sale and purchase of tangible personal property and certain services, there are also numerous exemptions from these taxes.

South Carolina Code § 12-36-2120(28)(a) provides an exemption for “medicine and prosthetic devices sold by prescription”. The South Carolina Supreme Court has limited the scope of this exemption in the area of durable medical equipment, however, by interpreting the statute as requiring the prosthetic to be an artificial device that replaces a missing part of the body. Home Medical Systems, Inc. v. S.C. Dep’t of Revenue, 382 S.C. 556, 677 S.E.2d 582 (2009).

Effective July 1, 2007, South Carolina Code § 12-36-2120(74) also provided a rate reduction from 6% to 5.5% in the state sales tax for “durable medical equipment and related supplies” which are (a) defined under federal and state Medicaid and Medicare laws; (b) paid directly by funds of the State of South Carolina or the United States under the Medicaid and Medicare programs, where state or federal law or regulation authorizing the payment prohibits the payment of sales or use tax; and (c) sold by a provider who holds a South Carolina retail sales license and whose principal place of business is located in South Carolina.

This initial rate reduction from 6% to 5.5% reduction was subject to potential further reductions based on annual general fund revenue growth in the state forecast by the South Carolina Board of Economic Advisers. Provided an annual minimum 5 percent growth in annual state revenue was predicted, the sales and use tax rate was to be reduced 1 percent per year until the rate became zero, at which time sales and uses of qualifying durable medical equipment and supplies was to be exempt from South Carolina sales and use taxes. The earliest the zero rate was to apply for sales and uses of qualifying durable medical equipment and supplies was the period beginning July 1, 2012.

Since the initial adoption of South Carolina Code § 12-36-2120(74), the South Carolina Board of Economic Advisers has not predicted the required 5% growth in annual state revenues and the applicable tax rate under the statute has remained at the initial 5.5% rate. This is not surprising given the general economic conditions in the Southeast since 2008.

During the 2011 Session of the South Carolina General Assembly, the General Assembly adopted a new law, Act No. 32, which modified the rate phase-out of South Carolina Code § 12-36-2120(74). Under the new law, the rate imposed on sales of durable medical equipment and related supplies are as follows:

▪ for sales occurring from July 1, 2011 to June 30, 2012, the sales and use tax rate is now 3.5 % (plus any applicable local sales and use tax);
▪ for sales occurring from July 1, 2012 to December 31, 2012, the sales and use tax rate will go down to 1.75% (again, plus any applicable local sales and use tax); and
▪ beginning January 1, 2013, there will be no state or local sales and use tax on sales of qualifying durable medical equipment and the South Carolina Code § 12-36-2120(74) exemption will be fully implemented.

Taxpayer Impact

This is obviously good news for South Carolina DME retailers. The new rate reductions for sales and purchases of qualifying durable medical equipment are automatic each year, and will be effective without regard to state economic conditions forecast by the South Carolina Board of Economic Advisers. This will now provide some level of certainty to South Carolina’s DME retailers and, with the eventual phase-out of the sales and use tax altogether beginning January 1, 2013, South Carolina’s DME retailers will no longer be at a competitive disadvantage to competitors from other states where these items have not been taxed.

About the Author

Erik P. Doerring
Erik leads the firm's economic development and tax practices. He is a business lawyer, with the skills of a tax litigator. Prior to joining McNair, Erik was an attorney with the IRS Office of Chief Counsel and the U.S. Department of Justice, Tax Division.